Quick question: inherited real estate - how to get a tax basis?

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IlliniDave
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Quick question: inherited real estate - how to get a tax basis?

Post by IlliniDave »

Me and my siblings inherited an interest in some farm property from our mom. We do not intend to sell the property at this time. I think I need (or want) to establish a tax basis in the event of a future sale. The property has not been appraised since 1993 when my grandmother passed away.

I had thought to simply hire a certified appraiser and get the property appraisal to establish a basis. Would the IRS generally consider that sufficient to establish the basis should we wind up selling the property down the road? If it matters the property is in Illinois, and is currently rented to a neighboring farmer which covers taxes and provides a token income.

Thanks.
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BL
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by BL »

No expert here, but that sounds like more than enough to me.

You might go to the court house and find out about recent sales of similar property to get an estimate.

Some areas have a fairly accurate number for value on property tax bills. I understand that others use numbers which are so far off as to be useless for that.

Perhaps a local farm real estate agent could be of help as well.

You are smart to be thinking of this now.
Afty
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by Afty »

I would think that hiring an appraiser is more than sufficient and probably better than most people do in this situation.
TheAncientOne
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by TheAncientOne »

You hire an appraiser knowledgeable in farmland values in that area to do a valuation estimate as of date of death. If the land has been leased for many years to a working farmer, the net cash flow will provide one means of estimating its worth while comparable sales will provide another.
not4me
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by not4me »

I think you are smart to get an appraisal now. There are many other threads where people wish they had.

I echo previously advice -- get a local qualified pro. I assume there was not an appraisal done as part of settling the estate. Depending upon the size and/or other unique features, some appraisers really are not qualified, so you may want to get a referral from someone else in that area if you don't know of one yourself. I'd try & make sure it was clear if there are buildings (sheds, etc?) on the property how much they are valued at. If there is any managed timber, that might need to be captured separately as well. If you have a cpa that you regularly use, you might ask them if anything else. I'm not familiar with Illinois to know if there are any wrinkles, but I think the IRS would accept & really don't know anything better.

Even if you don't plan to sell, things can change. The local government might decide to do something & take part thru eminent domain. If you were to gift some, it would carry the cost basis, etc

Sorry for your loss
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batpot
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by batpot »

I didn't think of it right away, and was able to get a back-dated appraisal, but it was only about a year after the fact.

Good plan!
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celia
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by celia »

When some relatives died, their house was appraised, but not sold until almost a year later (needed time to clean it out and fix things). When it sold for less than the appraisal, there was a capital loss which was acknowledged because the appraisal was referenced. (The selling price was partly lower because it sold in the winter off-season for home sales.) The "loss" canceled out other capital gains and had some carry over that could be used later.

We don't think about that part very often, but it can be useful.
Afty
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by Afty »

celia wrote: Thu Apr 26, 2018 2:44 pm When some relatives died, their house was appraised, but not sold until almost a year later (needed time to clean it out and fix things). When it sold for less than the appraisal, there was a capital loss which was acknowledged because the appraisal was referenced. (The selling price was partly lower because it sold in the winter off-season for home sales.) The "loss" canceled out other capital gains and had some carry over that could be used later.

We don't think about that part very often, but it can be useful.
I had the same situation. The house actually sold for exactly the appraised value, but there was a capital loss after accounting for transaction costs.
ryanhan
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by ryanhan »

Afty wrote: Thu Apr 26, 2018 9:11 pm
celia wrote: Thu Apr 26, 2018 2:44 pm When some relatives died, their house was appraised, but not sold until almost a year later (needed time to clean it out and fix things). When it sold for less than the appraisal, there was a capital loss which was acknowledged because the appraisal was referenced. (The selling price was partly lower because it sold in the winter off-season for home sales.) The "loss" canceled out other capital gains and had some carry over that could be used later.

We don't think about that part very often, but it can be useful.
I had the same situation. The house actually sold for exactly the appraised value, but there was a capital loss after accounting for transaction costs.
I'm interest to read this. My family is in this situation right now. My father-in-law passed away in January 2016. We had a real estate appraisal completed shortly thereafter to establish the fair market value of the property on his date of death. The property is on the market now, but it looks like it will likely sell for significantly less than the appraised value. I was under the impression that we could not benefit from the resulting capital loss because it had been his primary residence and, subsequent to his passing, continued to be my mother-in-law's primary residence (and, generally, you cannot claim a capital loss on your primary residence.)

For those of you referencing capital losses that could be used to offset other capital gains was the property investment property or a residence?
Afty
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by Afty »

ryanhan wrote: Thu Apr 26, 2018 9:23 pm
Afty wrote: Thu Apr 26, 2018 9:11 pm
celia wrote: Thu Apr 26, 2018 2:44 pm When some relatives died, their house was appraised, but not sold until almost a year later (needed time to clean it out and fix things). When it sold for less than the appraisal, there was a capital loss which was acknowledged because the appraisal was referenced. (The selling price was partly lower because it sold in the winter off-season for home sales.) The "loss" canceled out other capital gains and had some carry over that could be used later.

We don't think about that part very often, but it can be useful.
I had the same situation. The house actually sold for exactly the appraised value, but there was a capital loss after accounting for transaction costs.
I'm interest to read this. My family is in this situation right now. My father-in-law passed away in January 2016. We had a real estate appraisal completed shortly thereafter to establish the fair market value of the property on his date of death. The property is on the market now, but it looks like it will likely sell for significantly less than the appraised value. I was under the impression that we could not benefit from the resulting capital loss because it had been his primary residence and, subsequent to his passing, continued to be my mother-in-law's primary residence (and, generally, you cannot claim a capital loss on your primary residence.)

For those of you referencing capital losses that could be used to offset other capital gains was the property investment property or a residence?
For me, the house was vacant for about a year between my parent's death and the sale. Prior to that it was their primary residence.

This link provides guidelines on when you can take a capital loss on inherited property: https://www.hrblock.com/tax-center/inco ... -property/
denovo
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by denovo »

IlliniDave wrote: Thu Apr 26, 2018 11:07 am
I had thought to simply hire a certified appraiser and get the property appraisal to establish a basis.
Thanks.

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celia
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by celia »

ryanhan wrote: Thu Apr 26, 2018 9:23 pm I was under the impression that we could not benefit from the resulting capital loss because it had been his primary residence and, subsequent to his passing, continued to be my mother-in-law's primary residence (and, generally, you cannot claim a capital loss on your primary residence.)

For those of you referencing capital losses that could be used to offset other capital gains was the property investment property or a residence?
We appear to be talking about primary residences. Your case is different since your mother-in-law continued to live there. If she was a co-owner and died, the house would be eligible for a second step-up in value. But if she just moved, the house appears to not be eligible.

However, there must be some rule such as if the spouse continued to live there for a week, or month, or <some short period of time>, the house would be eligible. I doubt the IRS expects the surviving spouse to move on the day after death.
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IlliniDave
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by IlliniDave »

Thanks, everyone. This piece of property has a transfer deed which will become effective in two more days (required we still be living 30 days after Mom's death to be deemed to have survived her), so there wasn't any appraisal as part of the estate. A relative contacted a local real estate attorney who is familiar with the property through some other work he did for the family who recommended three appraisers. It does have some things that set it apart from simple farm land: it has water and sewer availability, and is in an area with an amount of developed commercial property nearby. So there's a good chance if/when the family decides to sell, it could sell for a price more reflective of its development potential than it's value as farm acreage. So as a piece of property it's sort of a tweener, which is why my first instinct was to spend the money to get a professional appraisal.

Kind of getting off topic, but the property now has 6 owners:myself and my three siblings (1/12 each), my aunt (1/3), and the other 1/3 is in a special needs supplemental trust for my uncle (effectively controlled by my aunt who is his guardian). As it stands today my siblings and I are ultimately the heirs of both my aunt and uncle, so in time if everything goes as expected it would wind up being held by just the four siblings. But there seems like a lot of opportunity for strife along the way, and afterward for that matter.

My aunt wants to keep the property in the family has offered to buy out the interest of any of the siblings who aren't inclined to be content just owning it and getting a little rent money every year. So we're a little at odds over the appraisal. She's only willing/able to buy interested parties out at the going rate for farm land in the county. But we both believe the appraisal would be higher because of the improvements and location. I prefer the more accurate (higher) appraisal so I don't have to overpay potential capital gains taxes down the road, and because I've already been burned by getting lowballed in an eminent domain proceeding. But I see a lot of value in reducing the number of owners, especially those more anxious to capitalize. I want to hang in there mostly for sentimental reasons (it's "Grandpa's farm" to me) and I'm in a more robust financial position than any of my siblings so can easily afford to do so; but I'm not so well off that it would be prudent to buy out siblings at the price a developer might pay. My head is starting to get the urge to squelch my heart and let my aunt buy my interest on the cheap just to avoid the potential future headaches.
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BolderBoy
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by BolderBoy »

IlliniDave wrote: Thu Apr 26, 2018 11:07 amI had thought to simply hire a certified appraiser and get the property appraisal to establish a basis.
Why not simply use the most recent county Assessor's tax assessment value of the property? No cost for that.
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not4me
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by not4me »

IlliniDave wrote: Fri Apr 27, 2018 6:40 am
Kind of getting off topic, but the property now has 6 owners:myself and my three siblings (1/12 each), my aunt (1/3), and the other 1/3 is in a special needs supplemental trust for my uncle (effectively controlled by my aunt who is his guardian). As it stands today my siblings and I are ultimately the heirs of both my aunt and uncle, so in time if everything goes as expected it would wind up being held by just the four siblings. But there seems like a lot of opportunity for strife along the way, and afterward for that matter.
Previous post really helped clarify your situation & prompted several thoughts.

I'm not familiar with Illinois land or assessment process in the county where the land is. But, I do know that it is not unusual for their to be multiple "values" for the same piece of land. I would expect the "farm" value to be a fraction of the "market value" -- & I'd guess 50-75%, maybe as low as 40% (hope others with real experience in Illinois will chime in). As an example only -- using numbers easy to deal with -- the farm value might be $180K, the market value $300k, and appraised value of $360k. The tax assessment is often not done yearly (again, in some state, don't know Illinois) & maybe done without regard to specific changes on a tract. Many counties now have online capability that anyone can use to look at what is currently shown for the land. You may want to check it out, but if nothing else can likely call them & ask. You may get at least ball park numbers to help decide.

So, if part of your concern was that a sibling might sell part of the farm value & the IRS would balk when you used the higher number, the appraiser is your friend. I don't think that is uncommon. If you do get the appraisal, they need to understand the situation fully. They likely have clients wanting to know the farm value because they are negotiating cash rent. Or someone else is testing the waters to know if a zoning change occured & BigCo wanted to buy for its new facility, what is the best use of the land...

This may be where the strife begins if not before. The aunt may fully feel the farm value appropriate, but siblings resent her lowballing when a professional says it is worth more. They may pressure her to increase the cash rent, balk at appraisal costs, etc. You seem to have a sense for what might occur & you obviously know the players. As a general rule, I'd advise against co-ownership & especially with family. If you do hold on, I'd make sure you understood the trust situation. Effectively it sounds as if the aunt has controlling ownership. What if she is no longer able to handle making the decisions? particularly if the uncle still needs the trust. Who takes over then? etc

Do you have a sense for which way your siblings lean? If all 3 of them sell out, you may be facing a situation of 'deferred gratification'. Using above example, you can look at it as having a $15k, $25k, or $30k "investment". Is the difference enough to YOU to stay in as a minority owner? If you think in x years you'd have total ownership, would you wait? It is hard to imagine the price going down in the long term, but maybe won't go up as much as other alternatives?

Not an easy decision with the emotional & financial aspects. Becoming increasingly common as older farmers die off & multiple heirs with differences wrestle thru. Good luck!
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by Pajamas »

BolderBoy wrote: Fri Apr 27, 2018 10:12 am Why not simply use the most recent county Assessor's tax assessment value of the property? No cost for that.
That tax value may not reflect the fair market value, especially for a farm.
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by Gill »

Get an appraisal by a qualified appraiser and stick it in your file. It could be well worth the expense when you wish to sell the property and establish the basis.
Gill
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IlliniDave
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Re: Quick question: inherited real estate - how to get a tax basis?

Post by IlliniDave »

not4me wrote: Fri Apr 27, 2018 1:49 pm Previous post really helped clarify your situation & prompted several thoughts.

I'm not familiar with Illinois land or assessment process in the county where the land is. But, I do know that it is not unusual for their to be multiple "values" for the same piece of land. I would expect the "farm" value to be a fraction of the "market value" -- & I'd guess 50-75%, maybe as low as 40% (hope others with real experience in Illinois will chime in). As an example only -- using numbers easy to deal with -- the farm value might be $180K, the market value $300k, and appraised value of $360k. The tax assessment is often not done yearly (again, in some state, don't know Illinois) & maybe done without regard to specific changes on a tract. Many counties now have online capability that anyone can use to look at what is currently shown for the land. You may want to check it out, but if nothing else can likely call them & ask. You may get at least ball park numbers to help decide.

So, if part of your concern was that a sibling might sell part of the farm value & the IRS would balk when you used the higher number, the appraiser is your friend. I don't think that is uncommon. If you do get the appraisal, they need to understand the situation fully. They likely have clients wanting to know the farm value because they are negotiating cash rent. Or someone else is testing the waters to know if a zoning change occured & BigCo wanted to buy for its new facility, what is the best use of the land...

This may be where the strife begins if not before. The aunt may fully feel the farm value appropriate, but siblings resent her lowballing when a professional says it is worth more. They may pressure her to increase the cash rent, balk at appraisal costs, etc. You seem to have a sense for what might occur & you obviously know the players. As a general rule, I'd advise against co-ownership & especially with family. If you do hold on, I'd make sure you understood the trust situation. Effectively it sounds as if the aunt has controlling ownership. What if she is no longer able to handle making the decisions? particularly if the uncle still needs the trust. Who takes over then? etc

Do you have a sense for which way your siblings lean? If all 3 of them sell out, you may be facing a situation of 'deferred gratification'. Using above example, you can look at it as having a $15k, $25k, or $30k "investment". Is the difference enough to YOU to stay in as a minority owner? If you think in x years you'd have total ownership, would you wait? It is hard to imagine the price going down in the long term, but maybe won't go up as much as other alternatives?

Not an easy decision with the emotional & financial aspects. Becoming increasingly common as older farmers die off & multiple heirs with differences wrestle thru. Good luck!
Thanks for the great response.

That a sibling might sell to my aunt and establish a lower basis isn't at the top of my list of concerns. Right now none say they want to sell anyway, so there is a need (in my opinion) to establish some sort of basis. I haven't lived in Illinois since I graduated from college but my understanding is that the use of a property determines the tax assessment value. Since it is currently farmed it is assessed as farm acreage. That also could be used as a basis but it potentially means a bigger bite for the IRS down the road. So this is a multiple value case like you described.One of the "hazards" is that if we lose the tenant and can't get a new one, at some point it might default to commercial valuation for tax purposes, making it a short-term financial drain on everyone.

My bigger concern is to have a leg to stand on in the event of an eminent domain situation. I don't know that an appraisal today would mean anything in that eventuality.

I am named in the supplemental trust as next in line to be my uncle's guardian should my aunt become unable to do so (the hazards of being the oldest of my siblings and viewed as "the responsible one"). The trust will exist for as long as he lives. It was set up specifically to isolate his interest in the property from his basic special needs trust. He has been mentally handicapped since birth.

Yes, my aunt has controlling interest in the property, basically controlling 2/3 at present (her 1/3 plus my uncle's 1/3 as his guardian). I don't remember all the right legal terms, but if it becomes necessary due to health I'll have power of attorney for her and be responsible for all those types of things on her behalf (and become my uncle's guardian per above). So it's possible that at some point I'll be "controlling" a majority interest in the property (albeit mostly in the best interest of others: my uncle, my aunt, or both).

I never really thought about it before, but that's potentially a lot of responsibility I've accepted down the road.

I am also executor for my aunt's estate and unless she changes her mind I'll potentially inherit another 1/12 interest from her, and possibly another 1/12 interest from my uncle (or a 1/6 interest from my aunt if he predeceases her). So I guess even selling my present interest to my aunt won't extract me from the situation forever.

Right now all my siblings want to retain their interest in the property and retain the property in the family, as does my aunt; but it is an emotional time and sentiment rules among the siblings. Down the road, things might change. Even someone who otherwise wanted to retain an interest might hit a financial emergency and need to convert to cash. You are right, anyone selling would probably have expectation of getting a price closer to the commercial potential than the farm acreage value. That could potentially place a burden on the other family members to raise the cash to buy them out.

As far as myself, I'm on track for early retirement in the next 12-19 months. I have a pretty good array of invested financial assets, a decent retirement annuity (pension) and later SS. So I'm perfectly content to consider it a small diversifier for my portfolio (I'm guessing the value of my 1/12 interest is 3%-5% of my present portfolio). I would be perfectly happy to go on indefinitely as a minority interest so long as it was a harmonious situation. I don't really have a need to turn a big profit on the windfall, and getting a small quarterly check for the rent net of taxes is more than enough. I would love to be sole owner one day but the total value of the land probably approaches half of my net worth so I don't see a prudent path to get there.
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